Japan to cut business tax from April

Japan’s ‘third arrow’ has been put to the bow, with a business tax cut planned to shave 2.51 percentage points off the rate from next year.

Japanese corporation tax will be dropped to 32.11 per cent from 34.62 per cent from April after an agreement was hammered out between prime minster Shinzo Abe’s Liberal Democratic party and its coalition partner today.

It will then drop to 31.33 per cent from April 2016.

Shinzo’s plan is the extra cash will trickle down from the corporations to employees through higher wages, which will help boost inflation and consumer spending.

Companies are already swimming in cash after years of low investment, as well as from the windfalls of monetary policy over the past few years that has inflated their profits through a devalued yen.

Meanwhile, the tax cut could end up creating problems for the government in the longer term, as it has pledged to run a primary budget surplus by 2020. One of the milestones is to halve the current deficit relative to GDP by 2015.

The government had to shy away from a second increase in consumption tax after the first, to 8 per cent from 5 per cent caused a massive pull back in the economy.